- The S&P 500 made modest gains to keep a four-week win streak alive but also climbed +20% above its mid-October lows to start a new bull market. It was also a notable week for broadening market gains, with small-caps outperforming large-caps, value stocks outperforming growth stocks, and non-U.S. stocks outperforming U.S. stocks.
- The U.S. Treasury yield curve inverted more over the week as short-dated Treasury yields rose more than intermediate-maturity Treasury yields, while long-dated Treasury yields fell slightly. The Bloomberg U.S. Aggregate Bond Index slipped -0.15%, and non-US bonds, measured by the Bloomberg Global Aggregate ex U.S. Bond Index, rose +0.08%.
- Economic data during the week gave more cover for the Fed to pause interest rate hikes at their June 14 meeting. The ISM nonmanufacturing unexpectedly fell, factory orders were lighter than forecast, and unemployment claims hit their highest levels since October 2021. However, surprise hikes out of Australia and Canada make the Fed decision more uncertain.
U.S. stocks enter new bull market as the rally broadened
Most major global stock market indices closed higher for the week. It was a week of back-and-forth, but relatively subdued, trading ahead of the upcoming week that includes a lot of inflation data and interest rate policy decisions by the Fed Reserve and the European Central Bank. For the week, the S&P 500 gained a modest +0.4%, marking it the fourth consecutive week of gains and, more notably, the move into bull market territory with Thursday’s close +20% above the mid-October bear market low. It was also a week of mean reversion as small-cap stocks and value stocks outperformed large-cap and growth stocks, which have dominated in 2023. The small-cap Russell 2000 jumped +1.9% higher while the tech-heavy Nasdaq eked out a slim +0.1% gain – just enough to preserve a 7-week win streak. While the recent streaks are impressive, many investors have been skeptical about the stability of a bull market with the narrow leadership that has defined 2023. If the gains continue to broaden beyond large-cap, growth, and technology stocks, like they did last week, it should help the market’s rally be more sustainable.
Continuing the mean reversion theme, international stocks outperformed their U.S. counterparts for the first time in five weeks. Developed international stocks, as measured by the MSCI EAFE Index, were up +0.6% for the week while the MSCI Emerging Markets Index gained +1.8%.
U.S. Treasury yields were mixed on the week with the 2-year U.S. Treasury yield up +10 basis points (bps) to 4.60%, the benchmark 10-year U.S. Treasury yield up +5 bps to 3.74%, while the 30-year U.S. Treasury yield shed -1 bps. The Bloomberg U.S. Aggregate Bond Index slipped -0.15% over the week while non-US bonds, measured by the Bloomberg Global Aggregate ex U.S. Bond Index, were up +0.08% for their second straight positive week.
Economic data during the week gave more cover for the Fed to pause interest rate hikes at their June meeting next week. The Institute for Supply Management (ISM) services activity survey unexpectedly fell and barely remained in expansionary territory. Factory Orders also came in lighter than expected and weekly jobless claims hit their highest level since October 2021. Growth in consumer borrowing also accelerated but primarily from revolving credit signaling that Americans may be running low on excess savings and are turning to credit cards to maintain spending levels. All data that seemingly would support a Fed decision to pause their rate hiking campaign. However, surprise rate hikes from both the Reserve Bank of Australia (RBA) and the Bank of Canada (BoC) this past week do raise suspicions that the Fed could follow along with yet another rate hike when it meets this week. Futures market are only pricing in about a one-in-thee chance of the Fed hiking this week, but with the RBA and BoC unexpectedly hiking last week, Wednesday’s Fed decision got more interesting.
Chart of the Week
Americans imported more goods and services from abroad, pushing the U.S. Trade Deficit up +23% in April. That’s a $14 billion jump to a six-month high of $74.6 billion. The March deficit was negatively revised to $60.6 billion from the originally reported $64.2 billion. Imports rose +1.5%, or $325.6 billion, reflecting increases from autos, parts, and cell phones. Exports fell -3.6% to $249 billion, the largest decline since the pandemic-related lockdowns, with the U.S. shipping less oil and fewer pharmaceutical drugs. Larger deficits subtract from Gross Domestic Product (GDP), the broadest measure of output for the U.S. economy. The trade deficit has been volatile since Covid-19 and has had an unusually large impact on GDP.
U.S. Trade Deficit Jumps to Six-Month High
U.S. trade deficit, monthly
Source: Census Bureau, The Wall Street Journal.
Note: Seasonally adjusted, goods and services.
- The ISM Non-Manufacturing Index expanded for a fifth month in a row but declined to 50.3% in May, down from 51.9% in April and far underperforming expectations for growth to 52.4%. The line between expansion and contraction is 50%, so May’s decline leaves the services sector just barely in expansion territory. All components of the index fell in the month. New Orders dropped the most, falling to 52.9% from April’s 56.1% figure. The Production Gauge fell from 52% to 51.5%. The Employment Barometer also declined, falling into contraction at 49.2% from the previous 50.8% mark. The Prices Paid Index, a measure of inflation, fell to 56.2%, down from last month’s 59.6%. Good news for the Fed and a potential pause in rate hikes.
- The S&P Global U.S. Services PMI rose to 54.9 in May, the fourth consecutive monthly gain, up from 53.6 in April but a bit down from the flash estimate of 55.1, which is where it was expected to remain. The rate of expansion was the sharpest since April 2022. A renewed upturn in new business from abroad in May contributed to a rise in New Orders. New Export Orders increased for the first time in a year and at a solid pace.
- April Factory Orders rose +0.4%, a slight underperformance from March’s downwardly revised +0.6% growth (originally +0.9%) and just half of the expectations for +0.8% growth. Like previous months, April’s gains were carried by strong airline orders. Factory Orders Excluding Transportation dropped -0.2% in April. Durable-Goods Orders rose +1.1%, primarily due to a +32.7% increase in orders for defense aircraft and parts (durable goods are released ahead of the full report). Core Capital Goods Orders (nondefense capital goods excluding aircraft), a proxy for business spending, increased +1.3% after a -0.6% fall in March. Nondurable Goods orders fell -0.1%.
- Growth in Consumer Credit accelerated in April, rising by $23 billion, the most in five months, above expectations of $22.0 billion, and above the negatively revised $22.8 billion in March (initially reported at $26.5 billion). Growth for revolving credit, which includes credit cards, rose $13.5 billion – down from last month’s $17.6 billion increase. Nonrevolving credit, which includes auto and school loans, was up $9.5 billion, higher than the previous $8.9 billion figure. It’s noteworthy that the pace of credit expansion in April was driven by revolving credit, which may indicate that consumers are relying more on using credit cards to maintain their spending in the face of stubborn inflation. The Fed’s data does not include mortgage loans, which is the largest category of household debt.
- The weekly MBA Mortgage Application Index fell -1.4% for the week ended June 2, the fourth straight weekly decline. The Purchase Index fell -1.7% following a -2.5% drop the prior week, and the Refinance Index slipped -0.7% following a -6.9% slump the prior week. The average 30-Year Mortgage Rate fell -10 basis points to 6.81%, which is +1.41 percentage points higher a year earlier.
- Weekly Initial Jobless Claims rose +28,000 to 261,000 for the week ended June 2, much higher than expectations for 235,000 and up from the prior week’s positively revised 233,000 (originally 232,000). The number of people already collecting unemployment claims (i.e. Continuing Claims) fell -37,000 to 1,757,000 in the week ended May 26, down from the prior week’s 1,794,000, which was revised down from the originally reported 1,795,000.
The Week Ahead
Inflation data and the central bank decisions will define much of the upcoming week on the macroeconomic front. The week is jammed packed with inflation data, with consumer (CPI) and wholesale (PPI) inflation to be reported on Tuesday and Wednesday, respectively, then import prices on Thursday, and expected inflation via Friday’s Consumer Sentiment report. The Federal Open Markets Committee (FOMC) will announce their interest rate decision Wednesday afternoon and the European Central Bank (ECB) on Thursday. The consensus view is that the Federal Reserve will stand pat and the ECB will lift interest rates by a quarter point.
Did You Know?
NEW BULL MARKET – On Thursday, the S&P 500 Index closed at 4,293.93, a +20% rise from its October 12 low, marking the start of a new bull market and ending its longest bear market since the 1940s. The index powered higher over the past few months, in large part because of a handful of companies, including Amazon, Tesla, and Nvidia, posting outsize gains (Source: The Wall Street Journal).
CHINA IMPORTS DROP – America is becoming less reliant on products from China. China’s share of U.S. goods imports for the 12 months ended in April fell to 15.4%. That’s the smallest it’s been since October 2006. U.S. companies have been looking for alternatives to Chinese manufacturers in recent years amid geopolitical tensions and the imposition of tariffs. China’s loss has meant gains for Europe, Mexico, and other Asian nations (Source: The Commerce Department, The Wall Street Journal)
TRILLION DOLLAR DEBT DELUGE – The U.S. Treasury has had to shelve bond issuance during the months-long debt ceiling drama. Now that a debt ceiling bill has passed, Wall Street is bracing for an expected $1 trillion of Treasury bill issuance in the near future. Roughly $850 billion of bond sales are expected between now and the end of September, according to JPMorgan analysts. There are fears that such heavy issuance in a short span will overwhelm buyers and may increase short-term borrowing rates, although no major upheaval is expected (Source: JPMorgan, The Wall Street Journal).
This Week in History
BIOTECH IS BORN – On June 8, 1916, Francis Harry Compton Crick was born in Northampton, England. In 1953, Compton together with James Watson discovered the double-helix molecular structure of DNA, the building block of life-and the biotechnology industry (Source: The Wall Street Journal).
Asset Class Performance
Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by The Retirement Planning Group. The performance of those funds may be substantially different than the performance of the broad asset classes and to proxy ETFs represented here. U.S. Bonds (iShares Core U.S. Aggregate Bond ETF); High‐Yield Bond (iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (SPDR® Bloomberg Barclays International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares U.S. Real Estate ETF). The return displayed as “Allocation” is a weighted average of the ETF proxies shown as represented by 30% U.S. Bonds, 5% International Bonds, 5% High Yield Bonds, 10% Large Growth, 10% Large Value, 4% Mid Growth, 4% Mid Value, 2% Small Growth, 2% Small Value, 18% International Stock, 7% Emerging Markets, 3% Real Estate.
* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.